As hard as it is to think about, the end of life will involve your loved ones cleaning out your home. At Merriman, we work with you and your estate planning team to get your financial affairs in order, both to ensure your wishes are met, but also for the ease of those people in your life who are most important to you. Margareta Magnusson recently published a book entitled The Gentle Art of Swedish Death Cleaning: How to Free Yourself and Your Family from a Lifetime of Clutter. Swedish death cleaning? While the sound of it may make you a little nervous, it’s a useful tool to cut down on possessions in a service to your loved ones and a fulfillment of that same goal.
Making a move can be an exciting and challenging time, but you want to make sure that relocating is the best thing for you and your family. There are many financial impacts to consider before making final decisions.
First and most importantly, there’s the happiness factor. Making a big change can be very exciting, but there are things you’ll leave behind. It’s good to consider the life you have built, your family, friends and community. You want this move to be something that enhances your life and makes you happy.
Next, carefully review the financial impacts. You might have a great job opportunity, but relocating should also make overall financial sense. Many things will impact your income and expenses, so don’t let a shiny, new salary be the only thing to sway you on the financial scale.
Consider the actual costs of the move. Some companies cover relocation costs, while others give you a budget or say you are on your own. Determine if you want to have movers pack up your things or if you want to do it yourself. We often don’t place a value on our time outside of work, and packing up an entire household can be time consuming and stressful. Assign a value to your free time, and use that to calculate what packing would cost you. If your new company isn’t paying for you to relocate, get three or four quotes. Research each moving company’s reputation and insurance coverage for your goods, in addition to the total cost.
Compare current rental/mortgage rates in your area with those where you are looking to move. If you own your current home, seek advice from a real estate professional to help determine if you should sell your existing home, or rent it out. Unless you are already familiar with the new area, you’ll likely want to have temporary/rental housing while you look for a new home. Take time to get to know your new area. You don’t want to rush into buying a home, only to discover a year later that you wished you’d waited and bought elsewhere. You want to find a place that makes sense for you and your family.
If you’re not familiar with the new area, you might need temporary/rental housing while you look for a new home. A temporary housing situation could mean an additional move, or added cost of storage. If you prefer to rent, determine the cost of breaking a lease, if needed, and the cost of moving into a new home. You’ll likely need the first and last month’s rent, plus a sizeable deposit. (more…)
You might want to open a new credit card to receive a bonus for signing up, or reduce the number of credit cards in your wallet with an annual fee, but opening and closing credit card accounts can impact your credit score. The question is, just how much does it impact your credit score, and is it worth sweating?
Most banks and credit lenders use FICO, which is the most common type of credit score. FICO scores range from 300 to 850. The score is based on the credit files of the three national bureaus – Experian, Equifax and TransUnion – with the following breakdown:
- Payment history 35%
- Amounts owed 30%
- Length of credit history 15%
- New credit 10%
- Types of credit used 10%
Payment history (35%)
This makes up the largest component of your score, which makes sense because your payment history demonstrates your ability to make payments on time. Even if you cancel a credit card, the payment history on that card will stay on your credit report for 10 years after the day it was closed. Positive credit data, created by otherwise using the card for purchases and making payments, stays on your account indefinitely.
If you’re just making minimum payments, it still counts as paying your credit card as contractually agreed, so that alone doesn’t hurt your credit score. If you find yourself forgetting to make payments, though, consider adding calendar reminders.
Amounts owed (30%)
Also known as debt burden, this category measures how much you’ve charged in relation to your overall available credit. This can be called your credit utilization rate, and it’s best to keep it lower than 20% of overall limit. Credit bureaus use three other metrics in addition to the credit utilization rate, including the number of accounts with balances, the amount owed across different types of accounts and the amount paid down on installment loans.
Canceling a credit card that has a high limit can hurt your credit score because it impacts your utilization rate. One way to remedy this is to ask for a higher credit limit to make up for the overall decrease on a remaining credit card. Be careful not to close credit cards before a big purchase like a home or a car, because you want your credit score to be as high as possible to get the most favorable interest rate and terms available.
Having a credit utilization rate of over 30% can hurt your credit score. If you’re just making minimum required payments, it’s likely that you’re also using more than 30% of your available credit, and the balance keeps increasing due to interest building up rather than being paid down.
Length of history (15%)
As your credit history ages, it can have a positive impact on your credit score. The two metrics tracked include average age of accounts and the age of your oldest account. It can be said that the oldest credit cards are the best credit cards for your credit score. This also takes into account how long other types of credit (auto, student, mortgage, etc.) have been established.
Closing a credit card may reduce the average age of accounts. Opening a new credit card will also reduce your average age of accounts, which hurts your score. The ideal age of credit card accounts is eight years or older.
New credit (10%)
Recent searches (also called hard inquiries) into your credit history, such as when you apply for a new credit card, can hurt your credit score. Hard inquiries also occur when a lender is evaluating whether to extend credit to you for an auto loan, student loan, business loan, personal loan or mortgage. Keep these inquiries to a minimum.
A soft inquiry, which occurs when opening a new brokerage account or part of a new employer’s background check, does not impact your credit score.
Types of credit used (10%)
This includes installment (auto loan), revolving (credit card), consumer finance (high interest rate, short-term loans like from Payday loans) and mortgages. Having a mix of different types of credit helps your score. This is based on the number and mix of accounts. If a loan is paid off recently, it will eventually be removed from your history.
The creators of the FICO score have an online credit score estimator you can use. Lastly, if you’re looking for a new credit card or you want to better understand the benefits of your existing credit cards, visit NerdWallet for comparison information.
As we get to know our clients, we always ask about the goals they have for their children and grandchildren. Over and over we hear a variation on a theme: I want them to have enough to do something, but not enough to do nothing. How do we go about teaching our kids and grandkids the value of a dollar, while giving them opportunities to have fun and enjoy what financial freedom can give? Moreover, how do we teach them about credit and borrowing money in a way that will encourage them to only spend what they have, and no more? We’ve found some useful tools to help young people learn the skills of budgeting and spending wisely, both with cash and credit.
To teach your teenager about spending, consider the American Express Serve prepaid debit card. The card requires no credit check or minimum balance, and has minimal fees. Parents can set up an account in their name, called a “Master Account,” and from there create up to four subaccounts for children aged 13 or older. Your child is issued a personal debit card with access to the funds in their subaccount, which can be used at merchants that accept American Express, as well as ATMs. They can also request funds from you, as well as send funds back from their account to yours.
Parents can view their child’s transaction history and set spending limits. Parents and children both have access to budgeting tools through American Express to see transactions divided into categories, or view each category as a percentage of their total spending. This is a great way to give kids power over how their allowance is spent, while being able to oversee spending and encourage good habits. These prepaid accounts can’t be overdrawn, offering another safeguard, and they do not affect the cardholder’s credit history.
Consider contacting your local credit union to see if they offer similar products with no fees.
What About Credit?
One of the best ways to teach your kids about credit, while also helping them build their credit history, is a secured credit card. Many major banks offer secured credit cards, which come with many of the same perks and services as traditional credit cards. Cardholders deposit funds into a checking or savings account. That deposit is then put on hold by the bank and used to secure the credit line on your credit card. A $300 deposit, for example, would become equivalent to a $300 credit line. The held funds continue to earn interest in the depository account, but can be spent using the secured credit card. Minimum payments are due monthly, and balances carried forward each month accrue interest charges just like with a traditional credit card. Balances and payments on a secured credit card are reported to the three credit bureaus, so making on-time payments is just as important.
After holding a secured card and making regular purchases and payments for a year, many banks will reassess the cardholder’s credit and, if strong enough, free up the funds used to secure the card, converting the account to a traditional card issued on credit. This type of card offers kids the ability to take time to learn about using credit cards, including the importance of making payments on time, as well as the process of billing cycles, interest charges, and spending only what they can afford to pay off each month. Some secured cards even offer rewards like traditional cards.
For something more traditional, college-age kids may consider the Discover it® for Students Card, which offers credit tracking and a reward for a good report card. A GPA of 3.0 or higher each school year will earn you $20 in rewards, and certain categories earn up to 5% cash back throughout the year. This card is also a great option for college kids who might be spending a semester studying abroad, as it charges no foreign transaction fee. Be sure to remind your student that while they may not see a fee for using their card abroad, they may still get less-than-favorable exchange rates on currency when using any credit card in another country. Lastly, in the event the card is misplaced, your student can freeze the card using an on/off feature accessible online and through the mobile app.
Cash and credit are both important tools for young people to feel comfortable using, and offering kids the freedom and responsibility to use them from an early age can make a huge difference in how careful they are with money down the road.
Your son has just turned age 18. The difference between ages 17 and 18 is that if your son has a medical emergency and is incapacitated, you can’t make a medical decision on his behalf or even speak to his doctors about his condition. Even if your son still lives with you and is a dependent, you don’t have the authority to call the shots since he’s now considered an adult. You’ll need to seek court approval to act or even be informed about your son’s medical condition.
To remedy this situation, children between the ages 18 to 25 can sign a medical power of attorney (POA) authorizing parents to act as their agent or proxy in medical decisions. This allows you to step in if they are disabled or incapacitated. This is even more important for kids leaving for college or taking a gap year to travel abroad.
Medical power of attorney documents can be created relatively inexpensively by estate planning attorneys. In most cases, an attorney can draft a medical POA à la carte, and you won’t have to revisit your entire estate plan. When drafting this document, it’s important to name an alternate medical POA in case you can’t be reached. This could be a relative in your son’s new college town or a close friend who is traveling abroad with him. What’s important is that someone with your son’s best interests at heart can act if your son were to become incapacitated.
If your child subsequently gets married, the medical POA should be updated. You don’t want a situation where the spouse has one desire but the parents, who have medical POA, have a different perspective.
Joe grew up in a financially relaxed household. Money came easily to his parents and when they needed something, it was there. He wasn’t spoiled, just well taken care of. Lucy was just the opposite. Money was scarce. Choices had to be made.
When Joe and Lucy got married, their two very different financial tracks had to merge. Much like Joe and Lucy, all of us have stories about what money was like growing up. As we enter into and manage relationships, merging those financial stories is a crucial element to the relationships’ long-term success. The following points provide guidance on how to do so.
Set expectations around your goals
Funding your children’s schooling is a classic example. For the Joe-like individuals, the answer seems obvious – their parents paid for their schooling, so they feel obligated to do the same. The Lucy answer is starkly different. Whether it’s paying for schooling themselves, or getting some kind of scholarship, they need to have some skin in the game. Whatever the outcome, being proactive with a plan is what matters.
Couples at or near retirement can face equally difficult crossroads. One person may be under the impression they’re going to downsize the home to buy a small condo and spend their time traveling. The other person is completely attached to the home they’ve lived in for 40 years and has no intention of selling it. They want to stay closer to their family and the community relationships they have built. Wow! Sounds like fireworks. Again, plan ahead. Don’t wait until your last day of work to have this discussion. Have it now.
If your goals align, great. If not, tweak them to arrive at a compromise. Goals, plans and circumstances change, so continue to have the conversation. I suggest an annual check in. That way things can evolve naturally and you’re not stuck dealing with a dramatic change 20 years down the road.
Who manages the finances?
It’s completely natural for one person in the relationship to gravitate to the finances. In our example, it’s typically the Lucy types – those that had to make choices about how to spend their money. Over time, that person comes to know their finances like the back of their hand. So what happens if that person is suddenly no longer around? Financial relationships can often live on a teeter totter. One person carries the weight, and the other is left suspended in air. Once the weight is gone, the other person may land pretty hard. Neither person in the relationship wants this, so it’s best to take steps to ensure both people have a baseline understanding of the household finances.
Tip: If you’re working with professionals (CFP®, CPA, etc.), make sure the non-financial person attends all meetings. This allows all parties to increase their plan acumen steadily over time and establish relationships with the professionals.
Be honest with yourself and with your partner about your financial habits. Until recently, I’d never encountered a “secret bank account.” In this case, someone siphoned money into a bank account their spouse was completely unaware of. The intention was to create a pool of money that could continually fund their spending habits. A secret like this is a ticking time bomb. It’s probably one of the primary factors behind the statistic that finance-related issues are the number one cause of divorce. Divorce is much more catastrophic than a secret bank account. Again, it’s best to have full disclosure.
Review your various account statements – bank, investment, credit cards, loans, etc. I know it’s easy to toss them into the shredder with the envelope still sealed, but most of us need to be aware of what we spend, so it’s good to get in the habit of reviewing the statements. Twenty minutes a month is all it should take. The intent is for you to get a rough baseline of where your money is going. Knowledge is power. Understanding the big picture of your spending and savings habits is crucial to your long-term success.
Like Joe and Lucy, we all come from different financial backgrounds. The above discussion topics will help those looking to merge paths as well as those who are on an independent path. Start with setting the expectations and defining goals together. From there, ensure that all parties have a baseline understanding of the financial picture. Move to full disclosure – for most of us, this should be nothing more than getting all of the information on the table. Before you know it, you’ll have a mutually agreed upon plan. Day by day and week by week, you’ll live this plan so you can accomplish all that is important to you.